WD-40 Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the WD-forty Company 4th Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen only mode. At the end of the prepared remarks, we will conduct a question and answer session. I would now like to turn the presentation over to the host for today's call, Ms.

Operator

Wendy Kelly, Vice President of Stakeholder and Investor Engagement. Please proceed.

Speaker 1

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-forty Company's President In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release and Form 10 ks for the period ending August 31, 2023. These documents are available on our Investor Relations website at investor. Wd40company.com.

Speaker 1

A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non GAAP measures. The descriptions and reconciliations of these non GAAP measures Are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward looking statements about our expectations for the company's future performance. Actual results could differ materially.

Speaker 1

The company's expectations, beliefs and projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, October 19, 2023. The company disclaims any duty or obligation With that, I'd now like to turn the call over to Steve.

Speaker 2

Thanks, Wendy, and thanks to all of you for joining us this afternoon. It's been a privilege and honor to lead our great company over the last year And even more special as my 1st year as CEO coincides with our 70 year anniversary. I've taken time over the last to meet with our employees across the business and around the world, and it was truly a pleasure to have the chance to listen to their personal stories. While it was not surprising to me, it's been exceptional to see and feel the depth of engagement and commitment across the organization. Witnessing their inspired energy, reinforce my own commitment and responsibility to nurture and build on our unique culture.

Speaker 2

I want to thank each of them for their dedication to drive superior results and the execution of our strategy. Looking at fiscal year 2023, for us, it was essentially a tale of 2 halves. Our first Half saw disruption resulting from general economic uncertainty, higher costs, the loss of our Russian business and price increases that were implemented. In the second half of the year, we saw volumes recover and we were also pleased with the recovery we experienced in EMEA, where we delivered double digit Constant currency growth for the last two quarters. Despite a difficult first half and the negative impact of currency of nearly $18,000,000 We still grew revenue by 4% over prior year.

Speaker 2

Excluding the impact of currency, revenue grew 7%, which is in line with our long term growth projections. We are encouraged by the improvement in trends we experienced through the second half of the fiscal year as we enter fiscal year 2024. Now turning to our Q4 2023 results. Today, I'll begin by discussing our sales results. I'll then walk you through our new 4x4 strategic framework, including an update on our 4 year results And the progress we've made as it relates to our Musqueam Battles.

Speaker 2

Sarah will provide further details on our 4th quarter results An update on our business model and our outlook for fiscal year 2024 and then we'll take your questions. Turning to our Q4 sales results. Today, I'm happy to share with you that we reported net sales of $140,500,000 Up nearly 8% over the Q4 of last fiscal year. Translation of our subsidiaries results into the U. S.

Speaker 2

Dollar Had a favorable impact on our consolidated net sales in the 4th quarter, on a non GAAP constant currency basis, 4th quarter sales Would have been $139,200,000 up 7% compared to the Q4 of last year. Now let's take a closer look at the 4th quarter sales results in our trade blocks starting with the Americas. Sales in the Americas, which includes the United States, Latin America In Canada, we're up 10% in the 4th quarter to $74,700,000 Maintenance products held in the United States increased 18% Driven by double digit growth of both WD-forty Multi Use Product and WD-forty Specialist. We're seeing solid improvements in volume Now that we've lapped the impact of the price increases that we put into place last fiscal year. In the Q4, we experienced Double digit volume and sales increases in the U.

Speaker 2

S. As a reminder, the U. S. Was the 1st region to implement price increases And therefore, have been the 1st region to recover from the related disruptions. Maintenance product sales in Latin America We're down 12% against the strong comparative period in the prior year.

Speaker 2

As you may recall, the Q4 of last fiscal year It was the strongest sales quarter in the region's history, where sales grew 80%, largely as a result of many of our marketing distributor customers Purchasing product in advance of price increases that went into effect near that time. Sales in maintenance products in Canada decreased slightly down 3% The favorable impact of sales price increases was completely offset by lower sales volumes due to weaker economic conditions in the region. We continue to experience positive momentum in our direct market in Mexico from the shift we made in 2020 from a distributor model. Maintenance product sales in our direct marketing Mexico decreased 19% in the 4th quarter as we continue to add new points of distribution, Making our maintenance products available in more places for more people who find more uses more frequently. Sales of our home care and cleaning products in the Americas were down 4% in the Q4 compared to the Q4 of last year.

Speaker 2

We consider our home care and cleaning products as Harvest Brands that continue to generate consistent contributions and cash flows, But are generally expected to become a smaller part of the business over time. We shared with investors last quarter that we're currently exploring options To further deemphasize our Home Care and Cleaning brands, we're currently conducting a global strategic review about the future of our Home Care and Cleaning brands. The result of this strategic review could mean many things, but no decision has yet been made. We look forward to providing an update in the future. In total, our Americas segment met up 53% of our global business in the 4th quarter.

Speaker 2

Now let's take a look at our sales results in EMEA, I'm happy to share with you that the recovery we began to experience in EMEA last quarter continued into the 4th quarter. Sales in EMEA were up 16 percent to $50,700,000 We saw strong sales in the U. K, Italy and Benelux, Which all turned in their best quarter's performance for the year. Currency fluctuations positively impacted our sales in EMEA, and on a constant currency basis, Sales would have increased 13% compared to the Q4 of last year, marking the 2nd consecutive quarter a double digit sales growth in constant currency. As you know, we sell into EMEA through a combination of direct operations as well as through marketing distributors.

Speaker 2

Sales in our EMEA direct markets, which accounted for 73% of the region's sales in the 4th quarter, Increased by 19% compared to last year. Maintenance product sales in the EMEA direct markets increased in the 4th quarter, Driven primarily by double digit growth of both WD-forty Multi Use Product and WD-forty Specialist in the United Kingdom, Italy and Spain, Mainly due to the impact of price increases, which is partially offset by slightly lower demand, which resulted in decreased sales volume. The increase in sales was also driven by the timing of promotional programs, particularly in the wholesale and trade channels. Sales in our EMEA distributor markets, which accounted for 27% of the regional sales in the 4th quarter increased by 9% compared to last year. This increase in sales was primarily driven by higher sales of maintenance products in many distributor markets.

Speaker 2

In total, our EMEA Segment made up 36% of our global business in the 4th quarter. Now on to Asia Pacific. Sales in Asia Pacific, which includes Australia, China and other countries in the Asia region, were down 20% in the 4th quarter to 15,000,000 In Australia, sales were down 1% in the 4th quarter, primarily due to the impact of foreign currency exchange rates. On a constant currency basis, Sales for Australia would have increased by 5% compared to last year, primarily due to higher sales of the home care and cleaning products as a result of successful promotional programs. In our Asia Pacific distributor markets, sales were down 38% in the 4th quarter Against the tough prior year comparison.

Speaker 2

As you may recall from last year, severe lockdown restrictions from earlier in the year were lifted, And we will resume shipping product to the area, resulting in strong sales during the Q4. In China, sales were down 4% in the 4th quarter, Primarily due to the impact of foreign currency exchange rates. On a constant currency basis, sales for China would have increased by 2%. In total, our Asia Pacific segment made up 11% of our global business in the 4th quarter. Now let's talk about our long term growth aspirations.

Speaker 2

At W40 Company, we're privileged to have one of the world's best known and most iconic brands. We have a strong competitive moat It allows us to capture the tremendous runway of opportunity before us. As we enter fiscal year 2024, I'm proud to introduce you to our new 4x4 strategic framework, which is tied to our purpose and values and will guide our future performance. Our 4x4 strategic framework was developed to drive profitable growth for sustainable value creation. There are 2 main elements of our strategic framework.

Speaker 2

The first element, which we refer to as our must win battles, focuses on what we do To increase sales of our maintenance products, this is an area of focus we've discussed with investors for several years. Our must win battles include Growing WD-forty Multi Use Product Sales Through Geographic Expansion, Growing Sales and Gross Margin Through the Premiumization of WD-forty Multi Use Product, Growing W40 Specialist product line through category leadership and accelerating our capabilities in building our brand digitally and maximizing our global digital commerce presence. Today, we're also introducing the second element of our strategic framework, which we refer to as our strategic enablers. These 4 strategic enablers focus on operational excellence and support how we will achieve our Muslim battles and include Ensuring a people first mindset where we can attract, develop and engage outstanding employees building a sustainable business for the future Achieving operational excellence in supply chain and driving productivity via enhanced systems. These are the primary areas that make up our 4x4 strategic framework and where we will continue to focus our time, talent and treasure To be successful in achieving our long term financial and operational goals, let's reflect on the progress we made against our must win battles for fiscal year 2023.

Speaker 2

Starting with Must Win Battle 1, lead geographic expansion, our largest growth opportunity in First Must Win Battle is a geographic Expansion of the blue and yellow Cam with the little red top. We estimate the potential global growth opportunity for WD-forty Multi Use Product To be approximately $1,000,000,000 and we're laser focused on delivering long term growth in our top 20 growth markets around the world. In fiscal year 2023, global sales of W40 Multi Use Product grew 2% over prior year. So this growth is not in line with our long term expectations, we ended the year strong and expect to see growth return to historic levels. For the year, we made good progress in several key markets on this muscle in battle with strong sales growth of 14% in the U.

Speaker 2

K, 14% in Mexico, 10% in China 17% in the U. S. Next is Muslim Battle number 2, accelerating premiumization. Our Smart Straw delivery system has been our most successful innovation in the company's 70 year history and is loved by end users around the world. Our EZ Reach delivery system provides our end users with even more options to solve problems in factories, workshops and homes.

Speaker 2

For us, premiumization is a major contributor to our revenue growth as well as gross margin expansion and also delights our end users. Over the last 5 years, we've achieved a compound annual growth rate for net sales of premiumized products of 7.3% in reported currency And 8.2% on a constant currency basis. We are on track to fully implement the WD-forty Smart Straw next generation capacity The New Americas and EMEA in the Q1 of fiscal year 2024, which we expect to accelerate the sales of WD-forty Multi Use Premiumized Products. On a go forward basis, we'll be targeting a compound annual growth rate for net sales of premiumized products of greater than 10% in reported currency. Our 3rd must win battle is to drive WD-forty Specialist growth.

Speaker 2

However, we see this as much more than an incremental revenue opportunity. Driving WD-forty Specialist Growth focuses on achieving category leadership by leveraging our core brand equity and taking advantage of our strong moat. It's about taking competitors off the shelf and increasing our market share. I'm happy to report that our efforts to drive brand awareness, maximize store placement And increased shelf space are paying off. For fiscal year 2023, sales of W-forty Specialist Products were just under $67,000,000 up 11%.

Speaker 2

We saw growth in W-forty Specialist Products across all three trade blocks with growth of 18% in the Americas, 7% in EMEA and 3% in Asia Pacific. Over the last 5 years, we've achieved a compound annual growth rate for net sales of WD-forty Specialist of 14.4% in reported currency And 15.4% on a constant currency basis. On a go forward basis, we'll be targeting a compound annual growth rate for net sales of WD-forty Specialist of greater than 15% in reported currency. Our final must win bet on the before is to turbocharge digital commerce. Our ambition here is to engage with end users at scale and become the global leader in our category within the digital commerce platform.

Speaker 2

Must win battle number 4 is about much more than selling products online. We view it as the accelerator for all our other must win battles. Digital Commerce is about brand building. It drives awareness of our brands by leveraging digital media to teach end users how to use our solutions In addition to driving online sales, for fiscal year 2023, e commerce sales were up over 35% for the year, Largely due to strong growth in the Americas. We believe the greatest benefit of this must win battle is to increase brand awareness and engagement online, As part of our digital commerce strategy in 2023, we launched our 1st global online marketing campaign, Repair, Don't Replace.

Speaker 2

This campaign further expands our opportunity to inspire millions of doers, makers, fixers and builders to use our solutions Not only to extend the lifespan of their tools or equipment, but also supports global efforts to reduce waste, preserve resources and leave a positive handprint And now turning to the second element of our strategic framework, our 4 strategic enablers, which collectively underpin our must win battles. We view these as how we will achieve our drivers for success. Starting with strategic enablement number 1, ensuring a people first mindset. At WD-forty Company, we know our people make us great. You will not find the greatest asset we have on our balance sheet because it's comprised of our 6 13 employees.

Speaker 2

We strive to be an employer of choice, where all employees can bring their best and genuine selves to work. We're committed to fostering a culture of belonging, Recognition, rewards and resiliency, while attracting, developing and engaging talent, which will drive our sustainable forward momentum. We will measure ourselves against this enabler by 3 quantitative metrics: employee engagement, Our Better Together scores and our employee retention rates. Next is strategic enable number 2, building a business for the future. Simply put, we are committed to operating our business in a manner that will have a positive environmental and societal impact and one that will Continue to create and protect long term stakeholder value.

Speaker 2

We've shared with you in the past that we are philosophically aligned with a vision to reach net 0 greenhouse gas emissions By 2,050, the term sustainability is increasingly perceived as a climate related matter, but we see it as more than that. We define sustainability as the ability of a business to exist for a long period of time, perhaps indefinitely. A sustainable enterprise and governance issues enhances the long term sustainability and resilience of our business and protects the long term interest of our stakeholders. We're in the process of setting further targets to reduce greenhouse gas emissions, which we will share in our 2024 ESG report. Strategic Enabler number 3 is achieving operational excellence in supply chain.

Speaker 2

Operational excellence has always been an important part of our strategy at Dibby's Woody Company. Our supply chain was tested during the pandemic and we learned a lot. The advances made by our employees to production capacity and product availability Sony helped to recover our supply chain, but also uncovered a myriad of ways to make it better than it is today. This strategic enabler is meant to continue that quest for operational excellence. We believe that a resilient and high performing supply chain enabled by people, capacity and capabilities We'll secure the long term success of our company.

Speaker 2

Our goal under this enables us to achieve on time delivery of greater than 95% And manage our inventory on hand to less than 90 days. Finally, strategic enable number 4, driving productivity via enhanced systems. We will identify and implement productivity solutions by using secure technologies to improve processes, provide effective access to critical analytics And deliver the highest value investments through effective project and program management. This will drive profitability improvements to enhance productivity, Controlled IT spending, increased employee satisfaction, as well as access to timely and accurate data That drives better decision making. The first project identified under the strategic enabler is our new cloud based enterprise resource planning system, Which the company is in the process of implementing and Sarah will discuss with you in a moment.

Speaker 2

To summarize, our 4x4 strategic framework It's designed to help us deliver on our long term revenue compound annual growth rate for maintenance products in the mid to high single digits On a non GAAP constant currency basis, this is supported by the growth outlook for each trade block, but we anticipate the real Americas to grow between 5% to 8%, We may have to grow 8% to 11% and Asia Pacific to grow 10% to 13%. In addition, our 4x4 strategic framework Will drive EBITDA margin expansion as we improve our gross margins and invest across the business to gain efficiencies and productivity improvements. With that, I will now turn it over to Sarah.

Speaker 3

Thank you, Steve, and thank you for that overview of our sales results. As I approach my 1 year anniversary as CFO for WD-forty Company, I reflect on the strong bench of leaders Across this organization that has supported me in my transition as well as all our global employees that I've had the pleasure of working with for the past 2 years. This past year has been a year of transition, not just for me, but for the company. And as Steve noted, fiscal year markets, currency fluctuations and cycled the exit of our Russia business. However, we started to see signs of recovery in demand And volumes in the second half of fiscal year twenty twenty three, giving us conviction as we head into fiscal year 2024.

Speaker 3

We turned in a strong performance in the Q4, resulting in a solid fiscal year 2023. I am happy to report that we grew our top line for the year despite the headwinds we faced due to currency. Furthermore, each of our financial results performed within the targeted guidance ranges that we provided mid year, even as we continue to invest across the business. Now let me walk you through our Q4 results and provide an update on our capital deployment. I will close by providing an updated view on our fifty Fivethirtytwenty five business model and providing fiscal year 2024 guidance.

Speaker 3

Turning first to our Q4 gross margin performance. Once again, we experienced strong gross margin growth over the prior year Q4. Our 4th quarter gross margin of 51.4 percent performed within the expected range we communicated. This margin performance reflects a 400 basis point improvement compared to the prior year 4th quarter And a sequential improvement of 80 basis points compared to the Q3 of this fiscal year. The 400 basis point improvement from prior year 4th quarter We are also driven by continued actions we have taken throughout the course of the year, including price increases across all our markets and geographies, which positively impacted gross margin by 4 60 basis points.

Speaker 3

These positive impacts were partially offset by changes in major input costs. Higher costs associated with specialty chemical costs and aerosol cans when combined negatively impacted our margin by 90 basis points. Finally, we recognize marginal benefits from lower costs associated with warehousing, distribution, freight and other miscellaneous input costs, which were offset by higher filling fees. Now let's take a deeper dive into margin for the Q4 by Tradewalk as we continue to focus on our margin improvement plans. Each trading block is at a different stage in recovering their gross margin, And I'm happy to see improvements in all three trading blocks this quarter over the prior year Q4.

Speaker 3

Within the Americas, gross margin was 49%, An improvement of 110 basis points. EMEA's gross margin was 53.6%, an improvement of 8 60 basis points. Finally, Asia Pac's gross margin was 55.7%, an improvement of 460 basis points. We are incredibly pleased with the improvements we have made to gross margin over our fiscal year 2023. Recovering our margin continues to be a priority for us, but we continue to believe returning our gross margin to our 55% target will be a multiyear task.

Speaker 3

Turning to our cost of doing business, which we define as total operating expenses, excluding depreciation and amortization and measure as a percentage of net sales. At WD-forty Company, cost of doing business is primarily comprised of 3 areas: Investments in our employees, investments in building our brand and freight expense to get our products to our customers. For the Q4, our cost of doing business was 34%, which increased from 31% in the comparable quarter of last year. This increase was largely due to higher employee related expenses associated with our earned incentive compensation, Increased professional service fees and higher travel and meeting expenses as we continue to get back to our normal travel schedules in a post pandemic world. We also continue to incur higher costs associated with the implementation and licensing of our new cloud based enterprise resource planning software system.

Speaker 3

Net sales growth is the most important factor in managing our cost of business towards our long term target of 30%. We are making deliberate investments in the business to support growth, but we expect to see improvements in the cost of doing business over time as net sales grow. Turning now to EBITDA. For the Q4, EBITDA margin, which we measure as a percentage of net sales, was 18%, which improved from 16% in the comparable quarter of the previous year. This is the result of the improvement in net sales as Cost of doing business as I previously noted.

Speaker 3

Before fiscal year 2022, we consistently delivered EBITDA margins of between 20% 22%. However, EBITDA margins continue to be under pressure due to the current inflationary environment and the intentional investments we have made to support our new 4x4 strategic framework. These investments are important growth accelerators for our future. Getting EBITDA above 20% remains a priority as we are laser focused on improving sales volumes, rebuilding gross margins and disciplined cost Once we are consistently back at our historic 20% to 22% level,

Speaker 2

then

Speaker 3

we will look to leverage scale and returns on our investments as we target 25 percent EBITDA margins over the longer term. Now let me discuss some items that fall below the EBITDA line. Net income improved to $16,600,000 in the 4th quarter, which was an increase of 12% over the previous year's 4th quarter. On a constant currency basis, net income would have improved 10% compared to the Q4 last year. Our net income reflects a rate of 25.4 percent for the provision of income taxes.

Speaker 3

Diluted earnings per common share for the quarter Our diluted EPS reflects 13,600,000 weighted average shares outstanding. Now let's look at our balance sheet and capital allocation strategy. Our resilient and asset light business model, Coupled with actions we have taken to grow our top line while improving gross margin are all contributors to maintaining a strong balance sheet and liquidity position. Maintaining a disciplined and balanced capital allocation approach is a priority for us. We will make the necessary near term investments to drive long term This year, we saw liquidity from operations improve As we made considerable progress in lowering our inventory levels, which we had invested in to stabilize our U.

Speaker 3

S. Supply chain in prior years. Our inventory levels peaked in the Q1 of fiscal year 2023 and since then we have reduced inventory by $32,500,000 For 27%. We will continue to make progress on our inventory levels in conjunction with our strategic enabler number 3 that Steve shared with you earlier. Our cash flow from operations in fiscal year 2023 was $98,400,000 and we elected to use $28,400,000 of that cash To pay down a portion of our short term higher interest rate borrowings.

Speaker 3

During the fiscal year, we invested $6,600,000 in capital projects, which is in line with our asset light strategy of investing between 1% 2% of sales. In addition to investments made in capital projects, Since fiscal year 2021, we have been investing in a new cloud based enterprise resource planning system, which is expected to go live in the first half Fiscal year 2024. Our investments to date include approximately $9,000,000 in costs, which have been capitalized We expect to incur these costs through the first and second ways of implementation over the upcoming year. This is a significant project for the company that is necessary as we continue to grow and support our business. For the foreseeable future, we expect maintenance CapEx of between 1% 2% of net sales per fiscal year, which is in line with our asset light strategy.

Speaker 3

In addition, we continue to return capital to our shareholders through regular dividends and buybacks. On October 6, our Board of Directors declared a quarterly cash dividend of $0.83 per share, payable on October 31 To stockholders of record at the close of business on October 20th. During the Q4, we repurchased approximately 14,000 shares of our stock at a total cost of approximately $3,000,000 under our current share repurchase plan. This concludes my discussion on our reported results. Before I share fiscal year 2024 guidance with you, I would like to discuss an updated view on our 5thirtytwenty five business model.

Speaker 3

As Steve shared earlier, today we introduced our new 4x4 strategic framework, which is designed to help us achieve our We see significant opportunities for sustainable growth, which Over time, we'll align with our fifty Fivethirtytwenty five business model objectives. Steve and I think about our fifty Fivethirtytwenty five business model Near term, we're targeting a range of 50% to 55% for gross margin, 30% to 35% for cost of doing business And 20% to 25% for EBITDA. We believe these ranges represent a more realistic short term view of the business In the current economic environment and they will also allow us to make the necessary investments to support our new 4x4 strategic framework. Strategic investments were made this year around ESG, Information Technology, Innovation and Organizational Design. These investments were significant year over year, but are not anticipated to grow at the same level going forward now that we have We believe these investments were necessary to jump start our 4x4 strategy.

Speaker 3

As we move forward, we will use the myriad of strategic levers at our disposal to move each component in the correct direction over time. Ultimately, we are focused on long term value creation. We know that when we consistently grow our top line, Manage our 50 Fivethirtytwenty five business model for EBITDA growth and leverage our asset light model, we can continue to drive an ROIC of greater than 25 That will generate continued strong and stable free cash flow, which we will continue to optimize for our best return on investments and to our stockholders. Looking more closely at our outlook for fiscal year 2024. Net sales growth is projected to be between 6% 12%, with net sales between $570,000,000 $600,000,000 in constant currency.

Speaker 3

We also expect gross margin to be between 51% and 53%. Advertising and promotion It is projected to be between 5% 6% of net sales. The provision for income tax is expected to be between 24% 25%. Net income is expected to be between $65,000,000 $70,000,000 and diluted earnings per share is expected to be Also, as a reminder, this guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and That completes the financial overview.

Speaker 3

Now I would like to turn it back to Steve.

Speaker 2

Thank you, Sarah. If we've learned anything over the last 70 years, it's a WD-forty company is a resilient business. I'm proud of what we've accomplished over the last year. Once again, I want to thank our employees as they are our most powerful asset and continue to be the real magic formula that drives our company forward. In summary, what did you hear from us on this call?

Speaker 2

You heard that despite a difficult first half and a negative impact From currency of nearly $18,000,000 we grew revenue by 4% over prior year. Excluding the impact of currency, revenue grew 7%, Which is in line with our long term revenue growth target. You heard that we saw improvements in volumes and sales In the second half of fiscal year twenty twenty three and are encouraged by these trends as we enter fiscal year 2024. You heard that we've introduced our new 4x4 strategic framework, which is tied to our purpose and values and will guide our future performance, investments and drive long term value creation. You heard that we're making investments across our organization, in our people, Products, processes, productivity and the planet and that we will continue to make the necessary investments to capture the tremendous runway for revenue growth And margin expansion in front of us.

Speaker 2

You heard that we saw liquidity from operations return as we made considerable progress in lowering our inventory levels You heard that our asset light model provides a cash flow for us to invest in the business You heard that we consider our fifty fivethirtytwenty five business model a long term beacon But we will move toward and align with over time, but that our short- to medium term focus is on driving EBITDA margins back above 20%. And you heard that we issued guidance for fiscal year 2024 and that we expect revenue growth of 6% to 12% on a constant currency basis, which equates to net sales of $570,000,000 to $600,000,000 Thank you for joining our call today. We'd now be pleased to answer your questions.

Operator

Please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered or you would like to withdraw your registration, Our first question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question.

Speaker 4

Hi, guys. Thank you for taking my questions. If we look out into 2024 with what you're expecting, are you assuming input and filling costs Decrease or kind of flatten out from here, just given kind of the different dynamics within the environment?

Speaker 3

Hi, Daniel. This is Sarah. So from an input cost standpoint, when we're looking at the guidance that we put out there, we're not seeing significant pullback And the input costs or the filling fees. So they are the filling fees are slightly up Over prior year and I think that trend, it's not substantial, but we are forecasting those to be A little higher going into next fiscal year than what we're sitting at right now.

Speaker 4

Okay. And then I think you mentioned the fifty fivethirtytwenty five Framework, that's not changed, right? I mean, I'm just misremembering, I think, but I think that's kind of what you guys were always kind of pushing towards, correct?

Speaker 3

Yes, the fifty fivethirtytwenty five framework is not changed and it continues to be our longer term beacon as to what we're striving for long term.

Speaker 4

Okay. And then just in terms of revenue, I think for geographic expansion, you said, I think, dollars 1,000,000,000 In sales opportunity, I think that's I assume that the addressable market, but that's or and maybe I misremember the number, but that's like double What's your roughly double what your sales are now. I was just wondering how you're going to attack that and I mean how viable that is kind of?

Speaker 2

Yes. Thanks, Daniel. This is Steve. So the $1,000,000,000 growth opportunities are long term growth aspiration based upon So that's not a number we're going to put out there in terms of achieving within 3 or 5 years, it's our long term growth opportunity. It's based on a benchmarked opportunity for all countries we're operating at a similar level to the U.

Speaker 2

S. So It is aspirational, but what it does do is give us a prioritized list of geographies for us to target and where to invest in.

Speaker 4

Okay. And final question, you mentioned getting inventories on hand, I think below I think the goal is below 90 days. I was just wondering where we are now And where we were historically speaking?

Speaker 3

So we currently, are a little over just shy of 4 months actually globally. So the trading block, it does differ by trading block when you look at the between the Americas, EMEA and Asia Pacific. The place that we've had the biggest headwinds from our inventory levels has been in the Americas, and we are still just shy of about 6 months of inventory there. So that's really where our opportunity is, is to continue to pull back our inventory levels and get that below get that closer to our 3 month target.

Speaker 4

Okay. Thank you very much.

Speaker 3

Thank you, Daniel.

Operator

Our next Question comes from Linda Bolton Weiser with D. A. Davidson. Please proceed with your question.

Speaker 5

Yes. Hi. Thank you. So sorry if I missed this, but did you say what the volume and price change was respectively in the quarter

Speaker 3

Hi, Linda. This is Sarah. So I can go through that. So in our deck, you will see it at the consolidated level. So from a 4th Quarter perspective, the impact of price had an 8% impact globally and the volume was slightly down just about 1%.

Speaker 5

Okay, great. And then, I'm just curious a little bit about the Sales guidance for the next fiscal year, it's a pretty wide range. I'm just wondering what represents The situation at the low and the high ends of the range, like what are the variables there that are making that range be that wide?

Speaker 2

Thank you, Linda. So we're still facing as we recover our volumes, so you've seen we're just tracing back The U. S. Being the 1st market to execute the price increases, we saw the same kind of 6 months, yes, this is back in May of the prior year. We saw 6 months of disruption, then we saw recovery, and now we're seeing double digit volume growth in the U.

Speaker 2

S. Market. In terms of our POS Sales for the 4th quarter, we were up 13% in units and up 19% in dollars in the U. S. Market.

Speaker 2

So We take a great deal of encouragement from the U. S. Market, which went first with the price increases and the strong volume recovery we've now got into double digits. So the next biggest piece of our business to recover is EMEA. You saw some recovery in the second half in terms of volumes, but we now expect those in FY 'twenty four To become positive, maybe not out of the gate, but over time, they will build and we're already seeing patches in our September results from the new fiscal year Well, we have pockets of really outstanding volume recovery in Europe as well.

Speaker 2

So we as expected, the guidance range It's really between the low end and the high end, Europe is quite a factor in terms of how strongly Europe can recover, the other region being Latin America. We expect a strong recovery in Latin America as well in volumes.

Speaker 5

Okay. And then, I think Well, let's see. Sarah talked about these different factors that increased your SG and A expense, the Investment Areas in FY 2023. And I think, Sarah, you said that it would be less growth of SG and A, maybe you could just clarify, do you mean like in dollar growth, the SG and A will grow less as a percentage growth rate? Or Is the ratio expected to come down or be flat?

Speaker 5

Or I mean, can you just give a little more color on the quantification of that?

Speaker 3

Sure, Linda. So yes, we have been investing in those areas that I mentioned. And a lot of the investment outside of The IT investments relate to people, right? When we look at ESG and we look at innovation, a lot of those investments over FY2023 We're hiring. We have an ESG team that's now fully dedicated to looking at sustainable products, looking at different ways for us To shift our products holistically, so there is investments that began in FY 'twenty two and now we're going to have Full year essentially of a lot of those individuals, from an SG and A perspective.

Speaker 3

So my comment on it not continuing at the same pace It's really around once we get through this fiscal year, I don't expect the percentage increase of our SG and A to be at the same pace that we've seen in the last 2 years, if that makes sense. Okay.

Speaker 5

And I was just wondering about your Well, I mean, Sarah, you usually have some quantification of like maybe the FX effect on the Top line growth, do you have a rough projection for that for FY 2024?

Speaker 3

So for FY 2024, we are using the average rate That we had in FY23, and so right now, it's apples to apples. When we start to get out into the Q1, Q2 and we have currency that starts to impact the comparable period. This year, we are going to guide our revenue guidance is going to stick with a constant currency guidance. So we'll probably starting in Q1, we will give both actuals and then a constant currency. So that number right now is Apples to apples on an average FX rate and then going into the year, we will be updating that and guiding to a constant currency revenue number.

Speaker 5

So you mean your 6% to 12% growth that's in constant currency?

Speaker 2

Yes.

Speaker 3

Yes. Okay.

Speaker 5

Okay. And maybe also you could do you have an oil Price assumption that is kind of built in for FY 2024?

Speaker 3

We do. And as you are aware, oil has been bouncing all over the place the last Month or so, but we have an estimate in the plan of between $80 $100

Speaker 5

Okay. And I guess this is more of a longer term question, a big picture question. It seems like for all the years I've been following you that The cost of doing business ratio has always been the struggle for you guys. I mean, your gross margin has Progress upward and you've had sales growth and everything else, but it seems to be stubbornly high and you do need to invest. There's all these areas that you need investment to continue to grow.

Speaker 5

So that's understandable. But I just kind of wonder, is it As a small company with relatively small size that you're just it's more of a struggle to gain like scale economies or I guess I'm wondering like where is the beef, so to speak, in terms of that ratio ever coming down? Do you have thoughts on that?

Speaker 2

So I think the I mean, Sarah, you can add to this. From my point of view, It's all about we are laser focused on these must win battles like never before. And I think we put out our historic rates in terms of what we've achieved. We put Forward rates by each of the battles in terms of what we want to achieve with the big ones being geographic expansion, premiumization and WD-forty Specialist. And so it's really about accelerating revenue growth to gain scale, having a higher sales base to leverage the cost base over.

Speaker 2

So If you take things like our ESG investments, that's a team of 3 people. In 5 years' time, that team will still be a team of 3 people, but we had to put it in place For various reasons. So I think that going forward, it's about driving faster revenue growth via laser focused execution on those battles And just accelerating the pace at which we execute our strategy.

Speaker 5

Okay, sounds good. Thank you very much.

Speaker 3

Thanks, Linda.

Operator

Our next question comes from Rosemarie Morbelli with Gabelli Funds, please proceed with your question.

Speaker 6

Thank you. Good afternoon, everyone.

Speaker 2

Hey, Rosemarie.

Speaker 6

Hi. I think that you and Sarah Steve kind of talked about what you are expecting for 2024. But I was wondering if you could give us a little more details. You are expecting top line growth of 6% to 12%. You're expecting a higher gross margin.

Speaker 6

Advertising and sales seems to be Similar to what you have been experiencing on the percentage of sales. So but we are looking at the low end at potentially lower EPS year over year. So I understand that you are spending more on that operating the cost of operation, But what will go wrong for you to have actually a down year? That is a part that I am struggling with. Why $478,000,000 Why not a flat year?

Speaker 6

What is the main factor that would create that?

Speaker 3

So there are a couple of things happening below the operating line. So we've talked already about the increase in the SG and A costs. So yes, there is less leverage being dropped to the bottom line this year versus prior year. But below the operations line, When we do go live in our new ERP system, we are going to have additional non cash amortization expenses hitting. So that is going to be increasing.

Speaker 3

And then in addition, our tax rate is going up. So it is going up 200 basis points as a result of Increased statutory rates in the U. K, so essentially increased foreign taxes year over year with statutory rate increases along with increased Interest rates on our uncertain tax positions in the U. S. So the impact on our tax line is not inconsequential And obviously, that's having a pretty decent impact on our EPS number.

Speaker 2

And if I can just add in terms of the kind of the drivers of the business in terms of revenue, So this volume recovery, particularly in Europe, right? So for the fiscal year, dollars 37,000,000 of volume loss this year. The big question is how much of that can we recover? We think we're likely to recover somewhere between 50% 80% for the year of that, but that's dependent largely upon Europe and Latin America recovery. And then on the gross margin, as Europe becomes a bigger part of our business, there is there are mixed benefits, right?

Speaker 2

Our gross margin in many of our Continental European businesses in particular, which suffered last year, is very, very strong. And so As we do more business in Europe and Asia Pacific, that country mix on gross margin is positive. And then also just simply From a gross margin point of view, selling more products, more of our highest gross margin products, so Smart Straw, Easy Reach, Premium Formats, WD-forty Specialist and selling less of our lowest gross margin products, Household products is a big driver of our gross margin going forward as well.

Speaker 6

So there is I am still confused about one thing. Wouldn't The cost of the ERP system that will now be expensed instead of capitalized, Wouldn't that be part of the SG and A? Why is it below the line? I am confused about that.

Speaker 3

So I look at When I say below the line, I meant below our EBITDA margin. But yes, amortization is sitting up in SG and A. So apologies for that comment.

Speaker 6

No, it's okay. Listen, I can use all of the different You

Speaker 1

have different lines.

Speaker 6

Okay. Then you are working on supply chain changes. What do you think you need to improve there? I mean everyone was hit with an increasing You know, inventory level after the pandemic and difficulties in getting raw materials, Then it was destocking. So what do you think needs to be changed for you to do better

Speaker 3

So We've spent a tremendous amount of time in the last year and a half stabilizing our supply chain, particularly in the U. S. And we are actually Pretty much done at this point with expanding our filler network in the U. S. We've also expanded our filler network in Europe.

Speaker 3

We also have expanded our suppliers. So we have multiple suppliers now for our cans and have continued to expand our supplier base as well. So We're feeling very good about where we're at from a supply chain standpoint. So from here, it's really about optimizing and volume solves a lot of those Problems, right? As we start to have volume continues to come back, we're able to push more volume across a broader filler base.

Speaker 3

And when we can push more volume into our filler network, we get better unit pricing, we're able to turn inventory quicker. So So there's a lot of things that we're looking at from an optimization standpoint. But at this point, we don't see any full scale changes to our supplier network. We're always looking at kind of what's the next longer term change for us. But in the near term, we feel very good about where we're at with our overall network on the supply And, Seid, Steve, anything to add?

Speaker 2

No, I think that's it. I think it's about optimizing the next stage, particularly within the Americas, right? So When you look at our gross margin by trading block, you can see that. So the Americas having reestablished their There are optimization opportunities there. If you look at our gross margin within the Asia Pacific region, we're already back up at 55.

Speaker 2

Europe's heading that way in terms of 52, 53. It's really the Americas where we need to extract those optimizations now.

Speaker 6

Isn't the reason for the lower margin the lower gross margin in the Americas? Well, no, I guess I am wrong. I was going to ask if it is because You have your headquarters here, but I guess that would affect the SG and A, it would not affect the gross margin, correct?

Speaker 2

No. And our U. S. Gross margins are pretty healthy. It's really been about Latin America gross margins and getting those back on track.

Speaker 6

Okay. And if I thank you. And if I may ask one last question. Any potential acquisitions you are looking at of New product line which would fit with your existing product lines?

Speaker 2

So we spoke in terms of kind of M and A. In terms of Last quarter, we spoke about the strategic review of the Household Brands. That's ongoing. We have had no further kind of decisions being made there. So watch this space for more In terms of acquisitions, I mean, we say that we're in the business of acquiring new points of distribution and new users every day, and that's Our focus needs to be going forward.

Speaker 2

Having said that, there may be ways for us in future to accelerate the growth, So that would be where, if anywhere, we might do something in the future, but nothing in the plans to report as of this quarter.

Speaker 6

Thank you very much. I really appreciate all the help. Good luck next quarter.

Speaker 2

Thank you, Rose. Thank you.

Operator

Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.

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Earnings Conference Call
WD-40 Q4 2023
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